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In this extract from his new book, Handling Investment Risk, the author examines operational risk and, with case studies ranging across Nigerian fraud, the split capital trusts scandal, Chase Manhattan in Russia and Deutsche Morgan Grenfell in 1996, shows how to deal with all the issues involved.

The author suggests that methods for rating investment risk are flawed. He suggests a risk analysis, management and projects (RAMP) approach. Number‐crunching will produce better results than listening to analysts.

Banks are often smug about their management of risk. Smugness may well be justified for market and credit risks, but banks can learn much from industry about managing operational risk. In order to manage operational risk, industry has evolved enterprise risk/reward management systems which coordinate an internal market for risk with variations to capital charges. Industry has at least three lessons to teach banks: use activity‐based costing variances to quantify operational risk; link operational risk to external prices via an enterprise risk/reward management system; and establish measures to govern an enterprise risk/reward unit.

Understanding first credit risk and the operational risk has taxed the banking industry. The author suggests that the evidence points to a lack of understanding within the banks and he argues that regulators should desist in trying to change the management practices of banks and instead encourage them to understand risk management better.

The author considers the issue of business continuity planning and asks whether it can cope with the emerging risks of a new century and whether it fits with the move to an enterprise risk approach. She assesses all the many risks involved from outsourcing to reputation risk and from the loss of intellectual assets to the loss of information systems. Her conclusion is that more concentration on a enterprise risk model is required.

This is an exclusive extract from The ValueReporting Revolution: Moving Beyond the Earnings Game, a new book published by John Wiley & Sons, Inc., and written by four senior PricewaterhouseCoopers experts. In this extract they discuss the dilemma of risk management and risk reporting. They argue that there are difficulties in disclosing risk on the grounds that it causes problems with competitors and investors alike. There is also a lack of consensus of how market risk should be measured. They assess how to quantify operational risk and conclude that the gap between improving risk management techniques and risk disclosures needs to be closed.

The author traces the history and philosophy behind the concept of risk transfer and concentrates on the underlying theory of insurance. He argues that the complexity of the modern business world has meant that the simplicity of the concept has been lost. To this has been added the additional burden of regulation and a greater concentration on risk management. He suggests that the concept of enterprise risk management is the one which cuts this Gordian Knot and describes its benefits in adding value to the enterprise.

Investigates company Web sites and the use by them of IT. Posits that some companies are too much in a hurry to understand what is going on in IT, while others are just plain scared of the new technology. Looks at risk with regard to security and whether risk is changing for better or worse. Discusses further the Internet and the risks that are involved therein –– with security an important part. Gives guidelines, in depth, on the four main issues to IT governance: market; design; operation; and security and uses bullet points for emphasis.

States that information and help on managing business risk was sought by the Financial and Management Accounting Committee of the International Federation of Accountants (IFAC). Examines Pricewaterhouse‐Coopers part in this – in their guise as Global Risk Management Solutions and the guidance in an emerging area. Further discusses risk management and the interest in it, its improvement possibilities and the adoption of an integrated approach. Proposes that the implementation of risk architecture is not a response to risk but rather a paradigm shift that involves enterprises changing.

The author takes mining as his paradigm and analyses the approach to risk management showing that financial and fuzzy factors should be taken into account and, if handled effectively, can produce a very useful operational risk analysis.

Investigates risk and the difference e‐commerce has had on global markets and, in particular, how Western experts managed to get wrong the prospects for the future with regard to banks in Russia and Indonesia. Posits that analysing risk can be done in four different ways: identifying risk factors; evaluating likelihood and effect; prioritizing and budgeting; and planning. Uses two case studies for extra emphasis – BT‐UK versus Vodafone; and Eurasia Mining plc (UK), operating in Russia and gives good advice in the aftermath of these. Closes in stating that risk‐seeking is a factor of modern operational risk and it is a recipe for disaster.

Considers the difficulties experienced by banks in implementing integrated asset and liability management. Explains some of the measures needed in the worlds of credit risk and interest risk. Presents a matrix for risk management and encourages training in this area.

In this article Terry Simister explains the background behind the initiative led by the Institute of Risk Management to establish recognised British and International standards for the practice of risk management. He discusses the historical development of the concept of risk management and how that led to recognition of the need to create a profession to deal with all its aspects. He analyses the difficulties in providing a comprehensive definition of risk management and the difficulties there have been in reaching agreement in the international arena. He concludes with an overview of the forces which make an agreed standard a necessity.